Codification Has Officially Arrived

For those of you calendar year end issuers the time to eliminate references to the pre-codification GAAP standards is here.  Your 3^rd quarter interim financial information will no longer contain references to the various layers of GAAP.  Instead of taking the time to use the cross-reference tool to the old standards and inserting long paragraph number references in place of the SFASs, EITFs, SOPS, and SABs, a better approach would be to transform your footnote disclosures to what the SEC continually refers to as “plain English”.

The benefit of using this approach is actually providing your investors with a meaningful description as to how your company actually applies the appropriate accounting guidance, instead of simply regurgitating accounting standards that few, and a lessening number of people, honestly understand.

A good starting point is to review your internal accounting policies and procedures, which in my experience, do not generally reference or contain any language from the accounting standards.  Further, remember the following keys when drafting financial statement footnotes and compliance documents in general:

• Know your audience – remember these compliance documents are designed to provide useful information to investors and prospective investors, so be aware of the general level of sophistication and educational backgrounds of these groups.
• Focus on the significant and material items – Don’t spend a lot of time writing about things that ultimately are not going to be material to the financial statements or operations of the Company.
• Write concisely and avoid redundancy – Run-on sentences are the best way to lose the interest of your reader in addition to confusing them.  Redundancy leads to inconsistency leads to SEC Comment Letters.

For more tips you can find a “plain English” handbook on the SEC’s website.

Don’t fear codification, overcome the learning curve as quickly as possible; it should ultimately make complying with the accounting standards easier and provide more understandable disclosure to keep your investors interested.

Proper Preparation Prevents Piss Poor Principal Auditor Performance

For certain individuals who have served this great country (thank you by the way) you may be familiar with what is known as the 7Ps (a vet just reminded me that the military version is 6Ps), and I thought it adapted to well to meeting your quarterly, annual, and seemingly non-stop compliance requirements as a public company.

For smaller reporting companies, or probably more fitting – smaller accounting departments, the “7Ps of SEC Accounting Compliance” couldn’t be more critical.

Midway through the third quarter (for calendar year ends) can be a good time to finish the interim reporting season strong and take significant steps towards preparing for year end and the dreaded audit, which by the way includes audits of internal controls over financial reporting for smaller reporting companies.

Since we are talking in 7s – here are 7 things to remember when preparing for your always positive, and happiness inducing audit experience:

1. Make sure your auditor is not in denial about the integrated audit requirement for smaller reporting companies.  Chances are this will result in an increase of fees.  Up front fixed pricing is ideal for budgeting puropses, but this is not the norm for most firms (coincidentally this is something we live by).
2. Get familiar with the codification.  It begins with the 3 rd quarter for calendar year ends so it is a good time to think about converting your summary of significant accounting policies into the SEC’s favorite “plain English” .  The cross reference tool is a great way to shorten the learning curve.
3. Accept the fact that integrated audits are required for smaller reporting companies – get prepared and believe the additional paper gathering (documentation) will increase your frustration level.
4. If you are a smaller reporting company and obtained any kind of debt or equity financing through anything other than traditional bank financing, now is a good to share the terms with your auditor.  The chances are generally high thay you have some complex accounting requirement that usually results in millions of dollars in surprise and meaningless liabilities.
5. Don’t forget about the SFAS 157 fair value requirements particularly if you have level 2 and level 3 assets or liabillities.  Start documenting and don’t forget about the FSP “clarifications” for SFAS 157 and 115 (corresponding codification).
6. Document supportable positions for other new and/or unusual transactions.  It seems like, in this market, all new transactions are unusual.
7. Spend some time improving the non-financial portion of compliance documents.  The SEC provides great reports (report applies to 10-K as well as IPOs) to help avoid your own love letters from Corp Fin.